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HMRC internal manual

Enquiry Manual

From
HM Revenue & Customs
Updated
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Penalties: Culpability - Defences: “Innocent Error”

TMA70/S97(1)

The onus is on you to demonstrate that there has been fraud or negligence. However, if you can show that there has been an error or omission and the explanation for this is not obvious, the onus should then be on the taxpayer to establish that the error was entirely innocent of fraud and negligence.

Typical explanations offered by the taxpayer are that they

  • made an isolated arithmetical or transcription error
  • had no knowledge of the existence of the source of income or the chargeable gain
  • did not know that the receipt had to be returned
  • had mislaid relevant records or had miscalculated the amount to be returned as a result of a bona fide mistake
  • had completely forgotten about the income or gain
  • were misinformed by someone thought to be reliable as to the assessability of the income or gain in question or as to the amount to be returned
  • had given all the information to the accountant, who had let them down.

Any claim of innocent error should be considered very carefully. It is important to establish all the facts and you should normally meet the taxpayer and his agent. A taxpayer can have made an innocent error even where the error is discovered in the first instance by HMRC. Conversely the fact that an error may in the first instance be disclosed by the taxpayer does not mean that it is innocent.

Although FA98/Sch18/Paras 20 and 89 refer to a company delivering or making the return, or submitting accounts, a company can only perform this action through its officers, employees or agents. It is therefore necessary to consider the question of the extent to which their negligence can be said to have been on behalf of the company in order to establish whether the company may be culpable.

A company is responsible for the actions of its officers and employees, if they are acting in the course of their duties, and prima facie an incorrect return is the company’s responsibility. The essential test is - did the company do through its officers etc. what a prudent and reasonable man would have done or did it fall short of this? The actions of the officers or employees are actions of the company and if their actions amount to negligence in the delivery of an incorrect return the company will be liable. Again it is necessary that the relevant facts are established - if the error was that of a junior employee was there also neglect at a more senior level in setting or checking the internal systems in place.

A different aspect which applies to large company or group cases is that there are in-house tax departments staffed by persons employed by one company but acting for other companies in the group in relation to the preparation and making of tax returns. Management or service charges of some sort may or may not be paid between the companies. This is a half way house between officers or employees doing the work for the company employing them and using wholly unconnected, typically big-4, firms to do the tax work. Depending on the individual facts it may be reasonable to expect that a company will have a more direct knowledge of and responsibility for the behaviour of in-house tax staff albeit consisting of employees of another group company. The fundamental test remains the same. What did the company do to ensure that the return in question was correct - was it everything that a prudent and reasonable man would have done?

TMA70/S97(1) and FA98/SCH18/PARA20

For 2007-08 and earlier years, if the taxpayer, or personal representatives of a deceased person, become aware that there is an error in a return or supporting document, they must remedy the error without unreasonable delay. Unless they do so, the return or document is treated as having been negligently or fraudulently submitted for the purposes of TMA1970/S95. Similarly a company will be liable to penalties under FA1998/SCH18/PARA20 if it fails to remedy an error in a return without unreasonable delay.